We've all heard the wedding vows. For richer for poorer, etc. 'Til death do us part. So what happens under tax law when two married persons decide to end the marriage? Well there are a few provisions in the code that deal with divorced persons.
The first section of relevance deals with alimony and separate maintenance payments. Its important to note that the recipient of the alimony has to report it as income while the payer is allowed to deduct it. Thats all well and fine, but what exactly IS alimony? Well for purposes of tax law, there are certain requirements that must be met.
1) It must be cash (or treated as if it were cash).
2) Must be paid under a divorce or separation agreement.
3) Cannot be stated in the divorce instrument that it is not alimony.
4) The former spouses are not members of the same household.
5) The requirement to make payments ends at the death of the payee spouse.
There is a lot of flexibility as long as those requirements are met. Making payments on behalf of a spouse such as paying for living or housing expenses can qualify as long as they meet the criteria above. There are also some pitfalls. It should be noted that child support is specifically NOT alimony. You can't also front load alimony to be within the first two years post marriage although exceptions exist when alimony ends due to death, remarriage, or payments fluctuate due to factors that cannot be controlled.
So what happens when there are children involved? Fortunately the law was written in contemplation of this.
A child is by default allowed to be claimed as a dependent by the parent who has physical custody for greater than 50% of the nights of the year. This dependency can be given to the non-custodial pursuant to the divorce decree, however the IRS will only recognize this via a written waiver (Form 8332) provided by the custodial parent given to the non-custodial parent. Despite what the court may have ordered, the IRS is not a party to the divorce and isn't bound by a state judge's order on a matter of federal law. In the instance where a custodial parent isn't cooperating with providing that written waiver, the remedy is to return to family court and seek a contempt violation with the divorce judge. The IRS will not assist in this.
In addition, the Earned Income Credit is only available to the custodial parent, as is the dependent care credit. The non-custodial parent cannot claim these credits under any circumstances. Despite this, the Child Tax Credit is awarded to whomever claims the exemption of the child. Finally, the filing status of Head of Household is based upon facts. Whomever provides more than 50% of maintaining the home of the child could (subject to other requirements) claim head of household status, regardless of whether they claim the child or not. As a practical matter, this would be the custodial parent, whether or not they waive the dependency exemption.
In closing I'll just say that a good tax advisor should be called in whenever divorce proceedings are initiated. The annals of tax court history are littered with cases of taxpayers who's divorce decree wasn't properly written or stated for tax purposes. Don't rely on your divorce lawyer to properly understand tax law.